Can I Claim My Education as a Tax Deduction?
Owning a business often means training staff, but this can be costly. Read about the requirements for claiming education as a tax deduction.
Education is an important part of building a successful business. Improving your own knowledge, as well as that of your employees has many benefits. However, it does not come without its costs. And whilst some businesses gladly subsidise staff training and other professional development courses, it’s not always tax deductible. In order for your education to be tax deductible, specific requirements must be met. In this article, we’ll discuss when you can claim professional education as a tax deduction.
Three golden rules
As a general rule, tax deductions must coincide with the needs or interests of a business. The following three points are key to determining whether a cost is tax deductible:
- The expense must have been for your business and not for private use
- If the expense is for a mix of business and private use, you can only claim the portion that is used for your business
- You must have records to prove it
For companies and small businesses with employees
If you follow the above formula, it would make sense that by training staff, it is in the interests of your business. With changes in technology and development, new needs must be met on a routine basis. It is incumbent on employers to ensure that these standards are upheld and staff are adequately trained. Accordingly, course fees, and some travel costs can be deductible to the business. Any professional education required should be outlined in an Employment Agreement where possible.
However, the link between the work requirement and staff training must be very obvious. In other words, if the education stood to benefit the individual more than the business and was of no real necessity to preservation or maintenance of workplace standards, it is likely not deductible. It would therefore form more a private use, than a business function. Whether there is a difference between training and professional education is also something that can be subject to question. The true nature of the definition and what it comprises of can vary. It really depends largely on the specific circumstances at hand.
The course undertaken must lead to a formal qualification and meet the following conditions:
- The course must have a sufficient connection to current work activities
- Maintain or improve the specific skills or knowledge required in current work activities
- result in, or is likely to result in, an increase in income from current work activities
One general obstacle is proving that the improvement in education will not lead to employees benefiting themselves. Conversely, it would likely not be applicable or tax deductible in the following circumstances:
- If the training is only generally related to the work
- enables new employment but in another field, i.e. for an employee to change professions entirely
Fringe benefit tax liability
Whilst some components of education can be claimed as a tax deduction, it is important to note what other implications this might have for your business. For example, any fringe benefit tax liabilities. Fringe benefits tax is a tax payable by employers for benefits paid to an employee (or an employee’s associate e.g. a family member) in place of salary or wages. This is to do with the ‘otherwise deductible’ rule. Ultimately, the otherwise deductible rule assumes that if the employee had hypothetically incurred the expense out of their own pocket, they would have been able to claim a deduction for the expense themselves. Accordingly, business owners can be met with these extra liabilities. It is important to be mindful of these.
For sole traders
As a sole trader, it is a little bit easier to claim self-education expenses as a tax deduction. As you are both an employee and the business, there is more scope in the ways you can benefit. You may be able to claim a deduction for self-education expenses if your self-education relates to your current work activities as both an employee and business owner, or if you receive a taxable bonded scholarship.
This too follows the three golden rules, but is a little more flexible given that it would be easier for you as a business owner to mould your business around your own needs. In other words, you can make your own business as multifaceted as you like, making varied education opportunities more relevant and applicable. You are also able to claim deductions on the following items that may coincide with completing some form of education:
- Accommodation and meals
- Car expenses
- Course fees
- Purchase of technical instrument and equipment repairs
- Travel fares and parking fees
- Internet usage
- Phone calls
- Stationary and postage
- Student union fees and amenities fees
Whilst there are a number of benefits in trying to capitalise on tax deductions, they can create complications when lodging your tax. It is very important that you abide by any and all taxation laws. It is not worth taking the risk on certain deductions unless you are aware of the appropriate requirements. Every workplace is different, and there can be a lot of grey areas when it comes to professional development and business expenses. If you are unsure about your situation, it may be worth consulting with a tax lawyer for advice.
Paul is an intern at Lawpath, and is currently studying a combined Arts/Laws degree with a major in criminology at Macquarie University. Paul has an interest in legal tech, which complements his broader interest in cyber crime/security and the way in which it is changing the world.